Big Investors Differ on Gold's Prospects

Metal Jumps Monday After Recent Declines; Paulson Is Believer

That has been a painful stance lately. But Monday finally brought some good news for the well-known hedge-fund manager and other gold bulls.

Gold jumped as high as $1,596 an ounce in electronic trading, after settling up $13.80, or 0.9%, at $1,586.20. Concerns about elections in Italy and big spending cuts in the U.S. helped drive the rally.

ENLARGE

John Paulson
Bloomberg News

It was a contrast to the declines seen over the past few months, as an absence of worrisome news helped damp enthusiasm for gold. Prices have fallen 5.3% this year and are down 16% from a record closing high of $1,888.70 set in August 2011. The final three months of 2012 were the metal's worst quarter since the 2008 financial crisis.

While many investors remain skeptical about the long-term prospects for gold, some large hedge funds are beginning to pay a bit more attention as the price has slid.

Behind the troubles for gold have been an improving global economy and stock market, which have left investors searching for riskier investments, such as stocks, and selling safe-harbor investments, like gold. Meanwhile, some who bought gold as a hedge against inflation have dumped the metal because consumer prices have been tame. Others say stocks will do at least as well as gold if inflation rises.

The dollar also has held up, which reduces gold's allure. And interest rates have moved higher, making it more costly to hold gold, which earns no return. Gold-mining stocks have been even more disappointing, partly because of management flubs and poor cash flow in recent years.

ENLARGE

Despite all the gold negativity, Mr. Paulson's firm, Paulson & Co., remains among the biggest fans and is holding on to much of its gold stash. Paulson continues to hold the largest position in the
SPDR Gold Trust
exchange-traded fund, or GLD, with almost 22 million shares, a position he didn't change last quarter. The firm's large positions in gold miners
AngloGold Ashanti
Ltd.
,
Detour Gold
Corp.
,
NovaGold Resources
Inc.
and
Barrick Gold
Corp.
were barely changed last quarter, according to filings.

It isn't clear if Mr. Paulson has adjusted his gold-derivative positions, which are considered large. But Mr. Paulson has told clients that he believes gold will rise over the long term, as global central banks expand their respective money supplies and inflation eventually picks up. He hasn't, however, been making a new push into gold, his investors say.

A few of Mr. Paulson's colleagues on Wall Street agree with this stance. Giant hedge fund
Och-Ziff Capital Management Group
LLC added to its position in GLD in the fourth quarter, but the firm has less than 1% of its overall holdings in the ETF, according to FactSet.

Vishaal Bhuyan,
who runs $20 million hedge fund Nariman Point LLC, says he has been buying physical gold "on dips," or as gold prices dipped recently, on a bet that interest rates won't soar.

"If you look at gold as protection, you need to own it in coins or bars and not an ETF," says Mr. Bhuyan, who is holding gold as a long-term investment but acknowledges prices could fall to $1,350 an ounce.

The bulls are in the clear minority lately, though. Money managers tracked by the Commodity Futures Trading Commission this month cut their bullish bets on gold futures and options to the lowest level in more than four years. Funds slashed their net bullish bets by 32% during the week ended Feb. 19 to about 42,000 contracts, the lowest November 2008.

Big-name hedge funds and other traders have turned away from gold in recent months, and some say they are staying away.

Steve Mandel's
Lone Pine Capital LLC dumped its entire position in the GLD ETF, in the fourth quarter, or nearly 2.6 million shares, according to securities filings. Other well-respected hedge funds, including Moore Capital Management LP and Scout Capital Management LLC, also sold all their positions in GLD in the quarter, according to filings. Representatives of the firms declined to comment.

"Gold has been a momentum trade and people are getting bored with it," says the head of a major hedge fund.

George Soros
's
$24 billion Soros Fund Management pulled about $100 million from its holdings in GLD in the fourth quarter, or roughly half of its position. The move, however, didn't reflect a souring on gold, according to people close to the firm, which in the past has used a variety of investments and derivatives to buy and sell gold.

Mr. Paulson made his reputation by scoring about $20 billion in profits betting against subprime mortgages. He padded those gains by buying gold in early 2009, well before it began to rally. Mr. Paulson began a dedicated gold hedge fund, which manages about $1 billion, to wager on gold.

The gold weakness has cost Mr. Paulson. His own money represents more than half the gold fund, according to investors. And Mr. Paulson has told clients more than half of his personal wealth is in his firm's gold-denominated funds.

In the options market, bearish sentiment has been on the rise. In the past month, the average ratio of trading in bearish options relative to bullish options has risen to its highest level since October 2011, according to options-data firm Trade Alert.

Some large hedge funds say they have become more interested in gold as it has slid and sentiment soured, but they are waiting for a sharper downturn before doing any serious buying.

Daniel Arbess,
who manages the PWP Xerion hedge fund, bought physical gold in late 2008 but sold his investment last year. Xerion is avoiding gold in anticipation that central banks may eventually need to ease off their monetary policy, driving rates higher.

"We don't want to be in gold ahead of the normalization" of rates, Mr. Arbess says, though he may come back into gold at a later date as a hedge against inflation as the Fed sells some of the bonds it has purchased.

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